Make no mistake, buying a business involves an element of risk.  History has shown that acquisition success can be difficult to achieve.  Various studies have revealed that many transactions do not live up to expectations and do not create additional value for shareholders (although much of the formal data is related to large public company transactions).  Acquisition success requires thorough analysis, preparation, commitment and strategic implementation.

In spite of the many apparent difficulties, M&A has played a significant role in building many of today’s leading public and private corporations, and will continue to play a pivotal role in growth and succession decisions of companies both large and small.  The foundation for success begins with the purchaser having a clear understanding of its strategic direction and plans.  This includes an assessment of strengths and weaknesses, and how both internal and external influences impact on the opportunities and threats that arise from this assessment.  In particular, how an acquisition can play a role in meeting those opportunities is critical to this assessment.

An important next step is developing a set of broad criteria that help identify potential acquisition targets that are most likely to meet the purchaser’s objectives.  The following are some examples of broad criteria or guidelines:

• Industry sector – those that fit with the purchaser’s existing industry or those identified as being opportunistic;
• Size – volumes of the desired business, or a target transaction value;
• Location – geography covered by the target business or location of management;
• Profitability – some purchasers are interested in turnaround situations (i.e. currently not profitable) while others are searching for a minimum level of existing profitability;
• Growth – some purchasers identify growth as a key acquisition criteria, either historic track record or future prospects;
• Products/services – the purchaser may require products/services that are complementary to its existing product suite, or the acquisition may be designed to be in very different markets so as to diversify the purchaser;
• Management – some purchasers want to operate the target as a standalone entity and may require existing management that will remain post-acquisition, while others have existing management capacity they want to utilize by acquiring a target that doesn’t have non-owner management;
• Financial resources – some purchasers set minimum rate of return criteria when assessing potential acquisitions.  The criteria should also include the debt/equity financial resources available to the purchaser;

• People resources – identify whether the purchaser has the necessary personnel available and capable to search for and analyze prospective acquisition candidates (recognizing that an acquisition search requires considerable time and expertise).

A purchaser’s specific criteria as applied against identified acquisition opportunities will help narrow the alternatives to be analyzed, but should not be so specific as to preclude all candidates from ever meeting all of the criteria.

Having defined its strategy and criteria (as above), the purchaser must assemble a team to search out and investigate acquisition opportunities.  The presumption here is that the team will conduct the search through active rather than passive means, as in today’s competitive M&A environment, it is unlikely a passive approach will lead to many solid opportunities.  The team must ‘advertise’ its search by making its objectives known in the M&A marketplace, which includes discussing same with bankers, accountants, lawyers and M&A advisors.  If a purchaser communicates its intentions to aggressively pursue acquisitions, numerous proposals will be submitted from potential vendors in various forms.  While many of the proposals will be unsuitable, the purchaser that has made it known that it is in the market for acquisitions will likely be one of the first ones viewed as a prospective buyer for a company that considers selling.  Having a reputation as an active, fair acquirer can be a tremendous asset for a company that is interested in pursuing a strategy of growth through acquisitions.